The
energy
  within
A N N U A L   R E P O R T   2 0 0 3




          WPS Resources Corporation
Highlights


Year Ended December 31                                                                  2003                 ...
At A Glance




                           WPS Resources Corporation




                      WPS Resources Corporation
 ...
The         energy within




           WPS Energy Services, Inc.


           WPS Power Development, Inc.

           Bo...
Contents
                                                                                          1   Highlights

       ...
Larry L. Weyers, Chairman, President, and Chief
                                                                          ...
The       energy within

A Quick Review of 2003:                                        The Challenges
Many Successes
    ...
This staff is focused on maximizing the value of company        This past year, 22 percent came from those two subsidiarie...
The       energy within

Wisconsin Public Service also announced a $250 million                 Managing and Reducing Risk...
Benefiting from Our                                             As a result, in 2003, WPS Energy Services assumed the
   A...
The       energy within

   Financings                                                            we are upgrading leaders...
The
              energy
                  within




At the Wisconsin Public Service garage in Oshkosh,
Wisconsin, James ...
The        energy within

other major investor-owned utilities in Wisconsin. Attributes            from WPS Energy Service...
The Energy to Inspire                                                  Small businesses are a case in point. They’re the c...
The        energy within




  Above: Charlotte Ostrowski, a Service Clerk, greets
  customers with a smile in Wisconsin P...
14   W PS   R E S O U R C E S   CO R P O R ATI O N
The        energy within

In itself, building a new power plant isn’t a tremendously        In 2003, we took decisive acti...
Forward-Looking Statements

                                                                                              ...
The      energy within
Management’s Discussion and Analysis

Introduction
WPS Resources Corporation is a holding company, ...
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integrys 2003 wpsr

  1. 1. The energy within A N N U A L R E P O R T 2 0 0 3 WPS Resources Corporation
  2. 2. Highlights Year Ended December 31 2003 2002 Percent Change Consolidated revenues – nonregulated (Millions) * $3,137.6 $ 410.8 663.8 Consolidated revenues – utility (Millions) * 1,183.7 1,050.3 12.7 Margins – nonregulated (Millions) 121.0 71.1 70.2 Margins – utility (Millions) 651.4 631.3 3.2 Income from continuing operations (Millions) * 110.6 118.5 (6.7) Income available for common shareholders (Millions) 94.7 109.4 (13.4) Earnings per average share of common stock Basic income from continuing operations * $3.26 $3.64 (10.4) Diluted income from continuing operations * 3.24 3.61 (10.2) Basic income available for common shareholders 2.87 3.45 (16.8) Diluted income available for common shareholders 2.85 3.42 (16.7) Dividends per share $ 2.16 $ 2.12 1.9 Book value per share 27.40 24.62 11.3 Common stock price at year end $46.23 $38.82 19.1 Shares outstanding at year end (excludes treasury stock and shares in deferred compensation trust) 36,621,976 31,808,779 15.1 Total assets (Millions) $4,292.3 $3,671.2 16.9 * Refer to Management’s Discussion and Analysis for explanation of changes in revenue and a discussion of discontinued operations. Ca s h Fl ow S u m m a r y Year Ended December 31 (Millions) 2003 2002 2001 Net cash operating activities $ 62.4 $188.5 $144.1 Net cash investing activities (244.0) (265.4) (134.8) Net cash financing activities 198.6 93.1 33.6 Change in cash and cash equivalents – continuing operations $ 17.0 $ 16.2 $ 42.9 2003 Earnings By Segment (Millions) G A S U T I L I T Y, $15.7 W P S E N E R G Y S E RV I C E S , $29.0 E L E C T R I C U T I L I T Y, $60.0 W P S P OW E R D E V E LO P M E N T, $(7.9) TOTA L E A R N I N G S $94.7 OT H E R , $(2.1) 1 W PS R E S O U R C E S CO R P O R ATI O N
  3. 3. At A Glance WPS Resources Corporation WPS Resources Corporation Wisconsin Public is a holding company based Service Corporation in Green Bay, Wisconsin. Upper Peninsula Subsidiaries provide products Power Company and services in both regulated and nonregulated energy markets. Wisconsin Public Service Corporation Upper Peninsula Power Company Business Business Established in 1883. Established in 1884. Regulated electric and natural gas utility. Regulated electric utility. Operates in northeastern and central Wisconsin and an Operates in primarily rural countryside covering 10 of adjacent portion of Upper Michigan (see map above). the 15 counties in the Upper Peninsula of Michigan 2,483 employees. (see map above). 171 employees. Market Serves 414,370 electric and 300,859 natural gas customers. Market Provides electric and natural gas products and services Serves 51,556 electric customers in 99 communities. to residential, farm, commercial, and industrial customers. Provides electric energy to 35 wholesale customers. Also provides electric power to wholesale customers. Main industries served are forest products, tourism, Electric operations accounted for 64% and gas operations and small manufacturing. accounted for 36% of 2003 revenues. Electric revenues are comprised of 88% retail sales Electric revenues are comprised of 87% retail sales and 13% and 12% wholesale sales. wholesale sales. Facilities Wisconsin customers accounted for 96% and Michigan customers accounted for 4% of 2003 revenues. Electric generating capacity based on 2004 summer capacity ratings is 79 megawatts. A peak demand was Facilities reached on January 22, 2003, with a system demand Electric generating capacity based on 2004 summer capacity of 154 megawatts. ratings is 2,206 megawatts, including share of jointly owned Electric property includes 2,826 miles of electric facilities. A peak demand was reached on August 21, 2003, with distribution lines. a system demand of 2,185 megawatts. Electric property includes 20,490 miles of electric distribution lines, 90% of which are operated at 24.9 kV. Gas property includes 6,845 miles of gas main, 70% of which is plastic main, and 85 gate and city regulator stations. W PS R E S O U R C E S CO R P O R ATI O N 2
  4. 4. The energy within WPS Energy Services, Inc. WPS Power Development, Inc. Both WPS Energy Services, Inc. and WPS Power Development, Inc. WPS Energy Services, Inc. WPS Power Development, Inc. Business Business Established in 1994. Established in 1995. Diversified nonregulated energy supply and services company. Owns and operates various nonregulated electric generation Principal operations in the United States include Illinois, Maine, facilities. Michigan, New York, Ohio, and Wisconsin. Principal Canadian Owns a portion of a synthetic fuel facility. operations include Alberta, Ontario, and Quebec (see map Provides electric power generation services. above). 193 employees. Provides retail and wholesale products primarily in the northeast quadrant of the United States and adjacent portions of Canada. Market Develops nonregulated assets. Operates nationwide and in adjacent portions of Canada 183 employees. (see map above). Significant focus on the northeast quadrant of the United States. Market Operates in the retail and wholesale nonregulated energy Products and Services marketplace. Provides engineering and management services and operations Emphasis is on serving aggregated residential and small and maintenance services. commercial, large commercial, industrial, and wholesale customers Areas of expertise include cogeneration, distributed generation, in the northeast quadrant of the United States and adjacent generation from renewables, and generation plant repowering portions of Canada. projects. Products and Services Facilities Provides individualized energy supply solutions, structured 74 megawatts of hydro and diesel generation facilities in products, and strategies that allow customers to manage the state of Maine and in New Brunswick, Canada. energy needs while capitalizing on opportunities resulting from deregulation. 503 megawatts of primarily coal-fired generation facilities in Pennsylvania. Provides natural gas, electric, and alternate fuel products, real-time energy management services, energy utilization 259 megawatts of combined cycle and fluidized bed generation consulting, and project development and management. facilities in upstate New York. Provides acquisition and investment analysis, market 50-megawatt cogeneration facility inCombined Locks,Wisconsin. management services, and optimization of energy assets 53-megawatt coal-fired generation facility in Cassville,Wisconsin. in the competitive marketplace. A minority interest in a synthetic fuel facility located in Kentucky. Patented DENet® computer technology allows customers Landfill and wood waste gas generating facilities in Wisconsin to continuously monitor and actively manage their and steam boilers in other states. energy usage. W PS R E S O U R C E S CO R P O R ATI O N 3
  5. 5. Contents 1 Highlights 2 WPS Resources Corporation At A Glance 4 Letter to Shareholders 10 The Energy Within 16 Forward-Looking Statements 17 Management’s Discussion and Analysis 47 Consolidated Statements of Income 48 Consolidated Balance Sheets 49 Consolidated Statements of Common Shareholders’ Equity 50 Consolidated Statements of Cash Flows Wisconsin Public Service agreed to sell to the Wisconsin Department of 51 Notes to Consolidated Natural Resources more than 5,000 Financial Statements acres of land near our High Falls hydro 88 Report of Management plant, and several other areas along the Peshtigo River in Wisconsin, and 88 Independent Auditors’ Report donate more than 5,000 acres to the 89 Financial Statistics state. Roger Trudeau, Director of Real Estate, near the High Falls flowage, is 90 Board of Directors implementing this agreement, which 90 Officers ensures the majority of land will remain accessible to the public and 92 Investor Information remain in its natural state. Ka Youa Kong (center), Corporate Recruiter, and Sandra Hallock (right), Human Resources Information Coordinator, bring qualified professionals into the WPS Resources organization. Pictured on cover, top to bottom: In the Wisconsin Public Service Rhinelander,Wisconsin, service center, Steve Boneck, Gas Maintenance Mechanic, and David Detert, Service/Street Mechanic, assemble a natural gas burner for a gate and regulator station. Sara Hurley, Manager of Financial Analysis, and Margaret Graese, Accountant, make sure WPS Power Development’s financial reporting adheres to current standards.
  6. 6. Larry L. Weyers, Chairman, President, and Chief Executive Officer of WPS Resources Corporation, at the historic and newly renovated Meyer Theatre in Green Bay, Wisconsin. Dear Fellow Shareholders The energy within. That’s what makes a company strong. It’s the internal energy that keeps things rolling within a company. Without this energy, a company would falter. And for a company in the energy industry, the energy within takes on additional significance. Our business is energy. We strive to understand that business better than any other company. Our mission is to provide the best value in energy and related services. Creating value for our customers, shareholders, employees, and the communities we serve is not a small task. It takes a tremendous amount of energy to pull it off—energy that comes from our employees. Their internal drive helps us fulfill our mission and reach our goals. That energy will propel us into becoming a world-class energy company. I am happy to report that 2003 put us firmly on track to be that company. We once again made substantial progress toward our goals, and the energy within is enabling us to succeed. Let me tell you how. 4 W PS R E S O U R C E S CO R P O R ATI O N
  7. 7. The energy within A Quick Review of 2003: The Challenges Many Successes We also faced a number of challenges during 2003. First, We filed an application to construct and operate a when approval of Wisconsin Public Service’s 2003 rate case 500-megawatt electric generating facility at our existing was delayed for three months due to other priorities at the Weston power plant site. Public Service Commission of Wisconsin,we lost approximately We agreed to sell our Sunbury generating station $5 million of potential electric revenue. We expected to receive in Pennsylvania to Duquesne Power. an order before the end of 2002, but the Commission did not grant approval until March 21, 2003. The delay in receiving the We purchased a one-third interest in the Guardian Pipeline. needed rate increase caused a decline in utility earnings that we We increased the dividend on our common stock were not able to overcome during the remainder of the year. for the 45th consecutive year. Maintenance issues, purchased power, and fuel costs took a For the seventh time in eight years, we met the challenge toll on the performance of WPS Power Development’s assets of a new all-time peak in energy demand when we during 2003. We diligently corrected the maintenance issues, supplied 2,185 megawatts on August 21. lowered fuel costs, and steadily improved the overall condition We completed credit line syndications for WPS Resources of the facilities and enhanced their long-term operation. and Wisconsin Public Service. The environment in the nonregulated energy marketplace has We won the bid to provide standard-offer electric service become more challenging due to, among other things, high to northern Maine for a 34-month period beginning and volatile natural gas prices, major accounting changes, the March 1, 2004. dramatic overbuild of capacity and, to a lesser extent, the We agreed to sell the Kewaunee Nuclear Power Plant reduction in wholesale market participants. Although electric to Dominion Energy. prices have been close to projections made at the inception of our investments, the forward value of nonregulated capacity markets We sold an additional 4,025,000 shares of our common was vastly overestimated by most industry experts and us. stock at $43 per share, and investor demand exceeded the number of shares offered. Although WPS Energy Services’ financial performance has been good the past few years, the overall financial performance by We issued $125 million of utility senior notes at very favorable rates. WPS Power Development’s assets is not acceptable. We sold 542 acres of land near the Peshtigo River In 2003, WPS Power Development took decisive actions to the Wisconsin Department of Natural Resources. to adjust to the new merchant marketplace. We announced the pending sale of our Sunbury plant to Duquesne Power. We began construction of a 50,000-square-foot addition We downsized the workforce for our New York assets to our Green Bay Service Center to house our 24-hour by about 20 percent and have still maintained reliable call center and additional customer support operations. operations. We also downsized WPS Power Development’s We announced a long-term agreement to provide more central office staff and focused the company on the efficient than 55 megawatts of wholesale electric service to two operation and optimization of its assets. In addition, we northeastern Wisconsin communities—Shawano moved nonregulated business development activities to and Clintonville. WPS Energy Services to facilitate its ability to market power We completed remediation efforts on a former from WPS Power Development’s generation assets. Given manufactured gas plant site in Green Bay, Wisconsin, current market conditions, we don’t expect to see significant and won the Mayor’s Beautification Award at the growth in the form of acquired generation assets, but we same time. are continuing to look for growth opportunities for our We sold a seven-acre former manufactured gas plant nonregulated companies that will enhance shareholder value. site after completing environmental remediation efforts. WPS Energy Services made adjustments to better integrate Our NatureWise and SolarWise for Schools renewable ™ ® its market focus with WPS Power Development’s generation energy programs were ranked among the top 10 in national assets. WPS Energy Services hired personnel with experience in Green Power programs based on customer participation. the market management of electric generation assets in New York, New England, and the Pennsylvania-New Jersey-Maryland markets and opened a new office in the Washington, D.C. area. W PS R E S O U R C E S CO R P O R ATI O N 5
  8. 8. This staff is focused on maximizing the value of company This past year, 22 percent came from those two subsidiaries, and customer energy assets in the northeast markets, with which is down from 32 percent in 2002. We have chosen this activities that include risk analysis, portfolio management, range because it allows us substantial growth opportunities scheduling, and settlement. and still provides the benefits of a balanced portfolio of business operations that derives 75 percent or more of our The energy industry experienced volatile and high earnings from utility investments. commodity market prices in 2003, and we expect these market conditions to continue into 2004. This can put a Our final financial goal is to provide investors with a solid return financial strain on undercapitalized market participants. We on their investment. That includes sustained dividends and continue to be diligent and improve our credit processes to dividend growth. Our total return to shareholders has exceeded minimize credit-related damage. On the plus side, market 12 percent on an average annual basis for the last five years, and volatility often creates opportunity and enhances the value we have increased dividends annually for the last 45 years. of the products WPS Energy Services is able to provide to the nonregulated wholesale and retail marketplace. Strategy Goals Our strategy continues to be balanced growth, adherence to our core competencies of energy and energy-related The energy within an organization is a key to success. But activities, and focusing our nonregulated efforts on the energy must be harnessed and driven in the direction of goals energy markets within the northeast quadrant of the with sustained effort. A company must develop its goals, lay United States and adjacent portions of Canada. We are out its strategy for accomplishing those goals, and then put continuing to place greater emphasis on growth of our the right leadership in place to ensure attainment of those regulated utility business while at the same time goals. It takes energy all along the way to keep us headed in carefully growing our nonregulated subsidiaries. the right direction. A major part of our strategy is to develop the infrastructure Our financial goals are simple. We expect to provide 6 to that will be needed to provide reliable supplies of energy 8 percent average annualized growth in earnings per share for many years and to provide customers with the best from continuing operations, but we know that the growth value for their energy purchases. may vary—sometimes higher and sometimes lower than the targeted range in any given year. We have surpassed this goal Generating the Energy over the past five years. With our strategy in mind, Wisconsin Public Service Another goal is to have between 15 percent and 25 percent completed construction of Pulliam 31 at a cost of approximately of our earnings come from our nonregulated subsidiaries: $38 million. This is an 83-megawatt natural gas-fired WPS Energy Services and WPS Power Development. combustion turbine peaking plant, which is located at our existing Pulliam power plant site in Green Bay, Wisconsin. Wisconsin Public Service also began work on the Weston 4 project. This is a new 500-megawatt, coal-fired plant that will be located at our existing Weston generating site near Wausau, Wisconsin. This will be a state-of-the-art unit that we plan to have available in 2008. It will be one of the most efficient and environmentally friendly units in Wisconsin and is expected to cost about $770 million. Pat Bourassa, Technical Support Supervisor, was asked to take on a new role—project director for the $23.6 million service center annex project for Wisconsin Public Service. She brought the building construction portion of this project in ahead of schedule and under budget. The entire project is expected to be complete in December 2005. 6 W PS R E S O U R C E S CO R P O R ATI O N
  9. 9. The energy within Wisconsin Public Service also announced a $250 million Managing and Reducing Risk contract to buy power from a new gas-fired plant Calpine Another major part of our strategy is the management and, is building near Kaukauna, Wisconsin. The Fox Energy when possible, the reduction of risk. In that regard, we made Center will be available early in 2005 and will provide up substantial progress in 2003. We will reduce our exposure to to 235 megawatts of capacity and energy to our system the merchant plant markets with WPS Power Development’s for ten years. proposed sale of the 402-megawatt Sunbury Power Plant, located in Pennsylvania, to Duquesne Power, L.P., a subsidiary Transmitting Energy to of Duquesne Light Holdings, for approximately $120 million. Where It’s Needed We expect to complete this sale in the third quarter of 2004. Transmission infrastructure must also be developed, and we made significant progress in that arena in 2003 through our We also reached an agreement to sell the 543-megawatt partial ownership of American Transmission Company, LLC. Kewaunee Nuclear Power Plant to Dominion Energy Kewaunee, LLP, a subsidiary of Dominion Resources, for During 2003, we transferred about $20 million of assets approximately $220 million. Wisconsin Public Service owns related to the Wausau, Wisconsin, to Duluth, Minnesota, 59 percent of Kewaunee and an unaffiliated utility owns transmission line project to American Transmission 41 percent. At closing, we expect to receive approximately Company for additional equity. $130 million in cash, transfer our decommissioning liability, and retain ownership of trust assets contained in one of two The Public Service Commission of Wisconsin approved decommissioning funds we established to cover the eventual construction of the 220-mile transmission line at a cost of decommissioning of the plant. The cash proceeds from the sale about $420 million. We anticipate funding approximately are expected to slightly exceed our carrying value on the assets 50 percent of total costs incurred, up to $198 million, and being sold. We expect that the retained decommissioning receiving additional equity in American Transmission fund, as well as most of the gain from the plant sale, will be Company. We expect to complete construction in 2008. available to Wisconsin Public Service’s customers in future In December 2003, we invested approximately $6 million in rate proceedings. The transaction is subject to approval by American Transmission Company with the transfer of other various regulatory agencies, including the Public Service recently completed projects to the American Transmission Commission of Wisconsin, the Federal Energy Regulatory Company, increasing our ownership interest to about Commission, and the Nuclear Regulatory Commission. 20 percent. We expect this transaction to be completed in 2004. We also signed an interconnection agreement with the At the closing of the sale, Wisconsin Public Service will enter American Transmission Company, which will provide for into a power purchase agreement with Dominion Energy the development of the transmission infrastructure necessary to buy energy and capacity generated at Kewaunee. The to transport the output of the proposed Weston 4 plant. agreement provides for an equivalent amount of electricity at substantially the same costs that we would expect if Ensuring Reliability with a current ownership continued. The power purchase agreement, Natural Gas Pipeline which also requires regulatory approval, will extend through On the natural gas side of our business, we purchased a 2013, when the plant’s current operating license will expire. one-third interest in the Guardian Pipeline for $26 million. This sale will transfer the risk of nuclear ownership and The pipeline, which began operating in 2002, stretches about operation, including decommissioning and fuel disposal costs, 140 miles from Joliet, Illinois, into southern Wisconsin. It can away from our customers and shareholders. We believe our transport up to 750 million cubic feet of natural gas daily. customers and shareholders will benefit from the sale and power Even though our principal utility doesn’t connect to it, we’ve purchase agreement. Additionally, the transaction fits with our supported the Guardian Pipeline since it was first proposed asset management strategy and lowers our business risk profile. because it provides potential benefits of competition to current and future customers in the state of Wisconsin. The sale of Kewaunee was a bittersweet decision for our We think it will be a sound addition to our business holdings. management team because Kewaunee has been a flagship for The pipeline is critical to natural gas reliability in Wisconsin, excellent operations in the industry throughout its 30-year history. and more than 88 percent of its capacity is under contract We are confident it will continue to operate well in the hands of through 2012. its new owner and the existing competent staff at Kewaunee. W PS R E S O U R C E S CO R P O R ATI O N 7
  10. 10. Benefiting from Our As a result, in 2003, WPS Energy Services assumed the Asset Management Strategy development efforts for our nonregulated businesses. Our asset management strategy calls for the addition or disposition of assets, including plants and entire business Financial Strength units, to create value for customers and enhance returns Successful infrastructure development and profitable growth for shareholders. Sales of excess land, buildings, and other is possible only if the energy within our company is combined facilities are a part of this strategy. with a strong financial position. The sales of Kewaunee and Sunbury are examples of our asset management strategy. This strategy will enable us to Rates to Sustain Us improve returns to shareholders by managing our assets in The ability to successfully conclude rate cases is essential a manner that reduces risk. for any regulated utility, and we are no different. During 2003, we were successful in a number of jurisdictions. Another example of our asset management strategy was the The Public Service Commission of Wisconsin granted December 2003 sale of an additional 542 acres of land near the Wisconsin Public Service authority to increase retail electric Peshtigo River to the Wisconsin Department of Natural Resources rates by 3.5 percent, or $21.4 million, effective March 21, 2003. for $6.5 million. This was part of a multi-phase agreement The Michigan Public Service Commission granted authority reached in 2001. Under terms of that agreement, we sold for a $300,000 increase in Wisconsin Public Service’s retail more than 5,000 acres of land to the state for $13.5 million electric rates on July 23, 2003, and also authorized recovery of in 2001. The state recently exercised its option to purchase $1 million of increased transmission costs through the power an additional 179 acres for $5 million in 2004. Following supply cost recovery fuel adjustment clause. In addition, the the close of the third and final phase of the agreement in 2004, Federal Energy Regulatory Commission ordered a 21 percent, we will donate 5,176 acres to the state. At that point, the or $4.1 million, interim increase in wholesale electric rates, Wisconsin Department of Natural Resources will have acquired subject to refund if the final rate increase is less, for nearly 12,000 acres of wilderness for $25 million. When this Wisconsin Public Service effective May 11, 2003, with transaction is completed, it will ensure that this pristine final settlement anticipated in the second quarter of 2004. wilderness will remain open and accessible to the public and in its present natural state. We have been the stewards of this Wisconsin Public Service also successfully concluded its land for more than 100 years, and it’s important that the new 2004 Wisconsin rate case with authorization to increase owner, the state of Wisconsin, carry on our stewardship. We retail electric rates by 9.4 percent, or $59.4 million, and retail are retaining about 300 acres of land in the vicinity that will natural gas rates by 2.2 percent, or $8.9 million, effective be sold for development at an auction to be held in late 2004. January 1, 2004. As part of this order, the Commission We also sold a seven-acre waterfront site for $940,000 to allowed a 12 percent return on equity with 56 percent the city of Oshkosh, Wisconsin, for park expansion. The equity in our utility capital structure. land was the site of a coal gasification plant on which we Rate increases of this sort are often hard on our customers, completed environmental remediation work. We are pleased but the increased rates are needed to maintain the reliability that Oshkosh residents will be able to take advantage of and safety of our service to them. Our customers should this property to develop and improve the riverfront. know that we are taking advantage of every opportunity to reduce costs and passing those savings on to them. Even Nonregulated Growth with the higher rates, our electric and natural gas rates are Another major part of our strategy is the continuing still among the lowest in Wisconsin and the nation. growth of WPS Energy Services. We made substantial progress in 2003 with the acquisition of a retail electric Financial Goals for 2004 business in Michigan and integration of a retail natural gas Grow our earnings per share from continuing operations at business in Canada. WPS Energy Services also secured major 6 to 8 percent on an annualized basis. new contracts in the New Jersey and Maine markets. They Achieve 15 to 25 percent of our earnings from WPS Energy are well on the way to many years of profitable growth. Services and WPS Power Development. We also decided that the time was right to take WPS Power Continue our moderate growth in the annual dividend paid. Development in a new direction—one focused more on Provide investors with a solid return on their investment. operational excellence than on development of power plants. 8 W PS R E S O U R C E S CO R P O R ATI O N
  11. 11. The energy within Financings we are upgrading leaders’ skills throughout the company. Leadership training courses have been developed for new In 2003, we took steps to enhance our strong financial leaders, new hires, and experienced leaders. More than position. In August, we completed a credit line syndication 83 percent of our formal leaders have been involved in these that established a $225 million revolving credit line for classes in the past 24 months. We use external courses to WPS Resources and a $115 million revolving credit line for augment our internal initiatives. Wisconsin Public Service. The 364-day senior unsecured revolving credit line facilities give us greater financial flexibility Recognizing the energy that can be created by a diverse as we grow our regulated utilities and nonregulated businesses. workforce, we are continuing our diversity efforts throughout WPS Resources. This initiative provides us with a workforce Our quality debt ratings provide flexibility and access to and culture that is rich in ideas and highly effective. capital markets at reasonable rates to help grow the business. This was apparent in December when we successfully issued $125 million of 4.80 percent 10-year senior notes Leadership Changes for Wisconsin Public Service. Due to the high ratings of the This past year brought about changes in our Board of utility issue, the notes were heavily oversubscribed prior Directors. Mike Ariens retired from our Board after serving to pricing, which resulted in a very favorable interest rate. for 29 years. We thank Mike for the tremendous contribution We also completed an equity sale last fall, which netted he made to our success throughout that term. $167 million. These debt and equity financings will help We are pleased to welcome Ellen Carnahan to our Board of maintain our financial strength as we grow. We are maintaining Directors. Ellen has a strong background in venture capital. our financial strength to support our quality credit ratings. She is proving to be a valuable asset to our future success. Benefits for our Shareholders On our management team, Jerry Mroczkowski retired from his position as Chief Executive Officer of WPS Power Development. We’ve paid a dividend on our common stock for Jerry has agreed to continue as a consultant for the company. 63 consecutive years, and we’ve rewarded our shareholders with 45 consecutive years of dividend increases. We feel it is Charlie Schrock left his position as President of WPS Power extremely important for us to continue to pay dividends to Development for an assignment at WPS Resources. Charlie is our shareholders, and we’ll continue to strive to do so. now responsible for several projects critical to our success. Our successful public offering of 4,025,000 shares of common In addition to his role as Senior Vice President - Development stock in November was oversubscribed, split about evenly of WPS Resources, in which he oversees all nonregulated between retail and institutional purchasers, and confirms the activity, Phil Mikulsky is now President of WPS Power value of our company to the investing public. During 2003, Development and will take responsibility for moving this we increased our common stock equity through that public nonregulated subsidiary in a new direction. offering and increased investor participation in our Stock Investment Plan. In 2003, shareholders invested more than The Energy Within $13.1 million to add additional shares to their accounts under the plan and reinvested about $10.1 million of dividends. WPS Resources truly does have energy within. It is the force that keeps us strong and successful. It enables us to deliver Our investors are recognizing the value of their WPS investment the best value in energy and related services. It allows us to as our stock increases its value. We closed the year 2002 with a provide solid returns for our investors. stock price of $38.82 and ended 2003 with a stock price of $46.23. The 52-week range was between $36.80 and $46.80. We plan to nurture the energy within and continue delivering For investors who held WPS common stock from December 31, value to our shareholders for many years to come. 2002, through December 31, 2003, and were able to reinvest their Thank you for choosing WPS Resources for your investment. $2.16 in dividends per share, their total shareholder return for the We will put all our energy to work for you. year was 25.3 percent—a very positive result for our investors. Sincerely, Energized Leadership The energy within WPS Resources must be combined with Larry L. Weyers Chairman, President, and Chief Executive Officer strong leadership to provide maximum value. In that regard, March 12, 2004 W PS R E S O U R C E S CO R P O R ATI O N 9
  12. 12. The energy within At the Wisconsin Public Service garage in Oshkosh, Wisconsin, James Martin (left),Manager – Customer Service, and Jody Dixon, Lead Fleet Mechanic, use a scanner to diagnose electrical problems in our truck engines. The Energy Within WPS Resources’ subsidiaries use their abilities to generate and deliver energy to homes and businesses across the central and northeastern United States and adjacent areas of Canada. That’s the kind of energy most people think of when they hear “WPS Resources.” But what about the energy needed to listen intently to our customers, to serve our communities with compassion, and to persevere in difficult times? That energy doesn’t come from a generator, pipe, or wire. It’s an energy that resonates within each of WPS Resources’ employees. The Energy to Serve The energy within our employees is, first and foremost, the energy to serve our customers exceedingly well. Whether that means repairing a broken gas main in below-zero weather or helping customers find ways to effectively use the energy we sell, our employees get the job done with spirit and integrity. We create products and services that are valuable to our customers, and in the end, create value for our shareholders as well. “There’s Energy in Everything We Do” At Wisconsin Public Service, our regulated electric and natural gas utility operating in northeastern Wisconsin and portions of Upper Michigan, we tell customers, “There’s Energy in Everything We Do”—and there is, according to feedback from our customers. In benchmarking research we conducted in 2003, Wisconsin Public Service rated among the “best in class” when compared with 10 W PS R E S O U R C E S CO R P O R ATI O N
  13. 13. The energy within other major investor-owned utilities in Wisconsin. Attributes from WPS Energy Services, our nonregulated energy investigated in the research included price, corporate marketing subsidiary. This surge in business was prompted, character, and service quality. in large part, by an independent article in the Akron Beacon- Journal. The reporter stated that “after checking out all the We spend a great deal of energy searching for new ways to prices, doing the math, and talking with each company,” serve our customers better. We look for innovations that are WPS Energy Services was the obvious choice for gas supply. convenient and customized for homeowners and businesses but that also enable us to provide service efficiently and at Consumers flocked to http://www.wpsenergy.com. The site a lower cost. received 2.5 million hits in August alone, and two customers per minute signed up online for natural gas service. More Many of these innovations are on the Web. Some of our than 40,000 individuals called WPS Energy Services, up most popular new services are our free on-line “Energy-Saving 700 percent from the usual monthly call volume. That’s a Tools” for homes and businesses. With Energy-Saving Tools, remarkable level of interest for an energy supplier to receive customers are learning ways to manage rising energy costs, on short notice. But with a firm grasp of Internet technology based on their own billing data and patterns of energy use. and a reliable customer service call center, WPS Energy And, they’re able to do so whenever they choose. The Services came through for customers. Our reputation in popularity of these energy management tools, along with Ohio helped increase our market share by nearly 4 percent on-line bill payment and other routine transactions available in a market of 1.2 million customers. on our Web site, brought double the number of visitors to http://www.wisconsinpublicservice.com in 2003 as WPS Energy Services’ reputation for a strong work ethic has compared with 2002. earned our company an ever-increasing amount of business. Since 2001, WPS Energy Services has been the supplier of Questions posed by small business customers receive choice for aggregated buying groups like Cleveland, Ohio. specialized attention in the Wisconsin Public Service Business In 2003, Northern Maine again chose us as its standard Information Center. These representatives are trained offer energy supplier. Under a 34-month contract, we will to meet the unique energy needs of small business managers be the electricity provider for all of Maine Public Service and owners, who wear many hats in their operations and Company’s service area, as well as customers of Houlton have little time or money to spend on energy issues. Making Water Company and the Eastern Maine Electric Cooperative. optimum use of phone and Internet technology, the Business Information Center cared for nearly twice as many business With a focus on competitive energy prices, reliable energy, customers in 2003 as compared to 2002. At the same time, top-notch customer service, and innovative technology, the cost of serving each of those customers via the Business WPS Energy Services is one of the fastest-growing energy Information Center was cut in half. marketers in the country. These creative on-line and call center solutions for our residential and small business customers have allowed us to centralize many functions previously carried out by local offices. So while we have more opportunity to serve, our customers can choose the way they want to be served, and costs are actually reduced. “Check the Prices, and Do the Math” In early fall, more than 45,000 new residential and small business customers in Ohio signed up to buy natural gas Strategy provides focus for the energy within. It is a constant behind all decisions made by WPS Energy Services’ staff. This includes, from left to right, Craig Avery, Risk Administration Leader; Richard Bissing, Vice President; Daniel Verbanac, Senior Vice President, who recently was appointed Chief Operating Officer; Ruqaiyah Stanley, Vice President; and Bruce Rizor, Vice President – Structured Energy Trading. W PS R E S O U R C E S CO R P O R ATI O N 11
  14. 14. The Energy to Inspire Small businesses are a case in point. They’re the constant Greatness heartbeat behind the economic vitality of any community. In Columbus, Ohio, where WPS Energy Services serves a WPS Resources is generating a ready supply of talented significant portion of the residential and small business leaders who can continue our tradition of outstanding, market, our employees work closely with the local chamber reliable service to customers. Our forward-looking Mentoring of commerce, helping members make sound energy choices. Program, for example, is in its fourth year. In Maine, our involvement with the Maine Technology Institute is helping to promote new business in the state’s Mentoring is a powerful, time-tested way of supporting technology sector. employees as they meet the challenges of being successful, productive employees. Right now in our formal mentoring Elsewhere, our employees are in schools, helping the very program, 75 mentors—seasoned leaders with specialized young become the leaders of tomorrow. From tutoring experience—are bringing mentees access to developmental elementary school children who have English as a second assignments, senior executive relationships, and growth language to leading teenagers in Junior Achievement, opportunities. In return, these yearlong relationships are we’re using our energy to inspire greatness. bringing a fresh perspective to our mentors, and the company is adding to a bank of strategic knowledge Energy to Overcome and potential leadership. Adversity At WPS Resources, new leaders prepare to lead effectively by Not every day is business as usual. That’s when our participating in our specially designed Leadership Training for employees draw from their reserves of energy to take New Leaders. This series of workshops focuses on how to lead their daily dedication even further. using WPS Resources’ corporate values and vision. It includes leadership basics as well as the five core competencies we have designated for all of our leaders: Coaching and Developing Recover Habitat and Riverway Others, Communication and Influence, Sales Ability and On May 14, 2003, a fuse plug and its foundation failed at Negotiation, Planning and Organizing, and Managing and Silver Lake reservoir, operated by Upper Peninsula Power Valuing Diversity. In their final class, graduates of this program Company, our regulated electric utility in Upper Michigan. develop an ongoing development plan for themselves, so they The flooding that followed disrupted power supply to some continue to grow as leaders. More than 200 individuals have consumers in the Upper Peninsula and damaged property completed this program over the past two years. along the Dead River. This incident tested the mettle of our employees and confirmed the value of teamwork between But planning for future success doesn’t stop there. At Upper Peninsula Power’s work groups. WPS Resources, we believe in inspiring future success even beyond our “four walls.” In the communities we serve, spirited Upper Peninsula Power employees immediately began employees give their time to help people and businesses thrive. working with local officials to ensure the safety of area residents. Within days, our hydroelectric managers conducted a flyover of the 25-mile stretch of rivers from the reservoir to Lake Superior and gained an understanding of the waters’ status. Portable diesel generators helped us fill our customers’ energy needs. And our Environmental Department arrived on the scene, identifying areas of environmental concern. Gary Delveaux (center), Manager – Business and Community Development for Wisconsin Public Service, discusses plans for a new industrial park with Green Bay Mayor Jim Schmitt (left), and Pete Thillman (right), Director of Economic Development for Green Bay. Gary advises on infrastructure and helps promote the new park to attract businesses. 12 W PS R E S O U R C E S CO R P O R ATI O N
  15. 15. The energy within Above: Charlotte Ostrowski, a Service Clerk, greets customers with a smile in Wisconsin Public Service’s customer walk-in center in Merrill,Wisconsin. Our walk-in centers will be redesigned by the end of 2004 to increase efficiency and better utilize our workforce. At right:Wisconsin Public Service owns and operates several hydroelectric dams in Wisconsin and Upper Michigan. Mark Nelezen, Operator and Maintenance Mechanic, is one of the employees responsible for safe and efficient operations at our High Falls, Wisconsin, hydro facility. Since then, the recovery effort has been ongoing. Our formal security measures, led by Chief Security Officer Upper Peninsula Power, with assistance from the Tom Meinz and our Managers of Physical and Cyber Security, Natural Resource Conservation Service, seeded a portion have increased tenfold over the past few years and have of Silver Lake, graded and stabilized the new channel become engrained into our daily activity. formed by the flood, and conducted an initial environmental All of our employees know they have the power and the assessment of the entire riverway from Silver Lake up to responsibility to protect their work space. Controlled access, Lake Superior. This assessment determined the stability of formal security procedures, and an acute awareness of our the river banks, as well as the flood’s impact on aquatic surroundings combine for our best defense. At WPS Resources, habitat, and told us what steps were still needed. we’re doing the best job we can to protect “our homeland”—our Upper Peninsula Power will continue working cooperatively workplace and community—during times of national threats. with the Federal Energy Regulatory Commission, state and local governments, state regulatory agencies, and local property The Energy to Grow owners toward recovery of the river area in 2004 and beyond. This will include a study of the economic feasibility of As the communities we serve grow and see success, so does rebuilding Silver Lake and restoring recreational use of the area. our company. At Wisconsin Public Service, more homes and businesses are driving the need for additional electric generation. Protect Our Part of the Homeland On September 26, 2003, Wisconsin Public Service officially Energy stands steadfast behind the achievements of our country applied to the Public Service Commission of Wisconsin and modern society. For that reason, the U.S. Department of to build a new 500-megawatt electric power plant called Homeland Security has included energy companies among the “Weston 4.” The plant, to be fueled using clean coal many organizations who must take extra measures to protect technology, would be located on the company’s existing themselves and their surroundings in light of world events. Weston power plant site near Wausau, Wisconsin. W PS R E S O U R C E S CO R P O R ATI O N 13
  16. 16. 14 W PS R E S O U R C E S CO R P O R ATI O N
  17. 17. The energy within In itself, building a new power plant isn’t a tremendously In 2003, we took decisive actions to adjust to the new unusual idea. But the way we’re doing it is. We strongly merchant marketplace. Most notably, we announced plans believe in the underlying principal that building a power plant to sell our Sunbury plant—a move that will reduce our risk is a community issue calling for community involvement. in the merchant market. We’ll close on this transaction in summer 2004 if the plant’s buyer, Duquesne Power, receives Since first announcing our plans to build a plant, approval by the Pennsylvania Public Utility Commission Wisconsin Public Service has taken extraordinary steps to and other needed regulatory approvals. involve and seek the opinions of the local community. One of our first moves was to form a Community Advisory Selling Sunbury fits well into our balanced portfolio and Panel. This group of community leaders, business people, asset management strategy, reducing uncontracted merchant and residents is a valuable sounding board for our ideas exposure and allowing us to focus our energies on markets and a great way to keep our hands on the pulse of the that are more in line with our growth strategy. community. Panel members meet monthly with our WPS Resources continues to believe that success on the Weston 4 team, discussing issues such as emissions control, nonregulated side of our business is achievable in markets aesthetics of the plant, and employment and tax benefits where we can both sell energy and operate, or contract for, for the local community. physical assets—thus fully integrating the energy services We also meet proactively with neighbors of the plant we offer the market. site and the public to keep them updated and allow everyone to be heard. Listening has led to several The Energy to innovations in plans for the plant, including a “loop track” Remain Strong that will reduce rail traffic and noise caused by coal cars. No matter where we operate, no matter which part of At WPS Power Development, WPS Resources’ nonregulated WPS Resources our employees work for, one thing is clear— power producer, strategy is focused as well on the pulse we are all about energy. Knowing this helps us funnel our of local communities and regions. personal energies into doing the best job possible for our The energy marketplace WPS Power Development operates customers. And, it prevents us from entering business lines or within has become more challenging, with extreme volatility, markets that could bring unreasonable risk to our shareholders. high gas prices, and new regulations and accounting rules, In 2003, corporations—especially energy companies— among other issues. The value of these markets was continued to be faced with public uncertainty. The news overestimated by many in the industry, including us. media provided additional coverage of corporate America’s struggles with ethics, and energy prices across the country were on the rise and volatile. Top: Over the past two years,Wisconsin Public Service employees According to research by Wisconsin Public Service in 2003, have cut their outage response time from 56 minutes to customers’ trust in our principal subsidiary, Wisconsin Public 28 minutes—a self imposed goal that makes customers’ lives Service, actually increased during this time. That confirms easier. Brian Anderson, Lead Line Electrician, and Jarrod Wurz, something we have always known: we are a company of Line Electrician, in Wausau, Wisconsin, work in all kinds of integrity. Corporate character isn’t just something we proclaim; weather conditions to meet this goal. it comes to life in the way our employees perform every day. Far left: The Weston 4 Power Plant project is moving forward with the guidance of a cross-functional team. Some key members include, left to right, Daniel Yagodinski, Project Creating a World-Class Manager; Kathy Hartman, Manager – Public Affairs; and Kelly Energy Company Zagrzebski, Corporate Community Relations Leader. Weston 4 At WPS Resources, our vision is “People Creating a is scheduled for completion in 2008. World-Class Energy Company.” The simplicity of these Left: Okho Bohm, Customer Solutions Project Leader, and Jeffrey words simultaneously provides a single direction for our DeLaune, Technical Research and Development Project Leader, company and allows for the ingenuity to get things done. develop demand response programs for customers of Wisconsin Our companies are fueled by hardworking, ethical Public Service. These new programs will help customers control employees, who are focused on getting energy to customers. costs and help the company manage load and supply. That’s the energy within WPS Resources. W PS R E S O U R C E S CO R P O R ATI O N 15
  18. 18. Forward-Looking Statements This report contains forward-looking statements within the meaning BASIC EARNINGS PER SHARE of Section 21E of the Securities Exchange Act of 1934. You can identify these statements by the fact that they do not relate strictly to 3.00 historical or current facts and often include words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” and other similar words. Although we believe we have been prudent in our 2.00 plans and assumptions, there can be no assurance that indicated results will be realized. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove 1.00 inaccurate, actual results could vary materially from those anticipated. $2.19 $2.28 $1.99 $2.10 $1.76 $2.24 $2.53 $2.75 $3.45 $2.87 Forward-looking statements speak only as of the date on which they are made, and we undertake no obligation to update any 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 forward-looking statements, whether as a result of new information, future events, or otherwise. We recommend that you consult any further disclosures we make on related subjects in our 10-Q, 8-K, and 10-K reports to the Securities and Exchange Commission. DIVIDENDS PER SHARE The following is a cautionary list of risks and uncertainties that may affect the assumptions that form the basis of forward-looking statements relevant to our business. These factors, and other factors 2.00 3.0 not listed here, could cause actual results to differ materially from those contained in forward-looking statements. 1.50 2.0 The pending sales of our Sunbury generation plant 1.00 and our Kewaunee nuclear power plant Completion of planned hydro sales 1.0 $1.80 $1.84 $1.88 $1.96 $2.00 $2.04 $2.08 $1.92 $2.16 $2.12 .50 General economic, business, and regulatory conditions Legislative and regulatory initiatives regarding deregulation 00 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 and restructuring of the utility industry, which could affect costs and investment recovery State and federal rate regulation, including the inability to obtain necessary regulatory approvals Changes in generally accepted accounting principles C U M U L AT I V E TOTA L R E T U R N * Growth and competition and the extent and timing of new business development in the markets of subsidiary companies 200 The performance of projects undertaken or acquired by subsidiary companies 150 Business combinations among our competitors and customers Energy supply and demand 100 Financial market conditions, including availability, terms, and use of capital $114.44 $101.94 $129.20 $142.58 $108.89 $170.39 $179.74 $201.78 $252.88 $84.75 50 Nuclear and environmental issues Weather and other natural phenomena 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Commodity price and interest rate risk * Assumes $100 investment in common stock at year-end 1993 and all dividends Counterparty credit risk reinvested quarterly. Cumulative total return for the ten-year period is equivalent Federal and state tax policies to an average annual return of 9.72%. Acts of terrorism or war 16 W PS R E S O U R C E S CO R P O R ATI O N
  19. 19. The energy within Management’s Discussion and Analysis Introduction WPS Resources Corporation is a holding company, which is exempt from the Public Utility Holding Company Act of 1935. Our wholly owned subsidiaries include two regulated utilities, Wisconsin Public Service Corporation (which is an operating entity as well as a holding company exempt from the Public Utility Holding Company Act of 1935) and Upper Peninsula Power Company. Another wholly owned subsidiary, WPS Resources Capital Corporation, is a holding company for our nonregulated businesses, including WPS Energy Services, Inc. and WPS Power Development, Inc. Our regulated and nonregulated businesses have distinct competencies and business strategies, offer differing products and services, experience a wide array of risks and challenges, and are viewed uniquely by management. The following summary provides insight into the operations of our subsidiaries. In Wisconsin Public Service’s Merrill, Wisconsin, service area, R E G U L AT E D U T I L I T I E S George Henrich, Jr.,a Street/Service Our regulated utilities include Wisconsin Public Service and Upper Mechanic, takes the time to make Peninsula Power. Wisconsin Public Service derives its revenues primarily sure the job is done correctly. from servicing retail electric and natural gas customers in northeastern and central Wisconsin and an adjacent portion of Upper Michigan. Wisconsin Public Service also provides wholesale electric service to market rules. As electric choice occurs, we believe we will lose some various customers, including municipal utilities, electric cooperatives, generation load but will retain the delivery revenues and margin. Also, energy marketers, other investor-owned utilities, and a municipal joint the capacity that is freed up should be competitive in our marketplace. action agency. Upper Peninsula Power derives revenues from the sale Deregulation of electricity is present in Michigan; however, no customers of electric energy in the Upper Peninsula of Michigan. have chosen an alternative electric supplier and no alternative electric The ability of our regulated utilities to earn their approved return on suppliers have offered to serve any customers in Michigan’s Upper equity is dependent upon accurate budgeting and forecasting techniques, Peninsula due to the lack of transmission capacity in the areas we serve our ability to obtain timely rate increases to account for rising cost in the Upper Peninsula, which is a barrier to competitive suppliers structures, minimizing the required rate increases in order to maintain entering the market. the competitiveness of our core industrial customer base and keep these WPS POWER DEVELOPMENT customers in our service area, and certain conditions that are outside WPS Power Development competes in the wholesale merchant electric of our control, such as macroeconomic factors and weather conditions. power generation industry, primarily in the midwest and northeastern An approximately three month delay in receiving retail electric rate United States and adjacent portions of Canada. WPS Power Development’s relief played a significant role in Wisconsin Public Service not earning core competencies include power plant operation and maintenance, its approved return on equity in 2003. As a result of this delay, we met waste disposal, and material condition assessment of assets. Revenues are with the Public Service Commission of Wisconsin and established derived primarily through the sale of capacity and energy generated from procedures and fixed timelines for completion of the 2004 rate case in plant assets through wholesale outtake contracts and into liquid financial order to allow the Public Service Commission of Wisconsin to rule on markets, primarily the PJM (Pennsylvania, New Jersey and Maryland), a more timely basis. These efforts led to a timely rate order for 2004. New York, and NEPOOL (New England Power Pool) markets, at spot Even with the higher retail electric rates, Wisconsin Public Service’s prices or day ahead prices. Historically, risk management activities have overall electric rates are among the lowest when compared to other not been utilized significantly at WPS Power Development. Excluding investor-owned utilities in Wisconsin and across the nation. The discontinued operations (the operation of the Sunbury generation plant, approved returns on equity for Wisconsin Public Service and which is pending sale, and certain other related assets), WPS Power Upper Peninsula are 12.0% and 11.4%, respectively. Development has approximately 425 megawatts of existing capacity, Perhaps the most relevant risk to our regulated utilities is deregulation. with fixed price contracts in place to sell approximately 86 megawatts. Deregulation of the electric and natural gas utilities has begun in The majority of the remaining 339 megawatts of generation have Wisconsin, especially for natural gas service. Currently, the largest natural been leased to WPS Energy Services under an operating lease effective gas customers can purchase natural gas from suppliers other than their January 2004, as discussed in more detail below. local utility. Efforts are underway to make it easier for smaller natural WPS Power Development, through its subsidiary ECO Coal Pelletization gas customers to do the same. In addition, the Public Service Commission #12 LLC, also owns an interest in a synthetic fuel producing facility. See of Wisconsin has been studying how to deregulate the state’s electric Trends, Synthetic Fuel Operation for more information. supply. We believe electric deregulation inside Wisconsin is at least several years off as the state is focused on improving reliability by WPS Power Development’s ability to generate revenues is dependent building more generation and transmission facilities and creating fair upon open access to physical markets and liquid financial markets. W PS R E S O U R C E S CO R P O R ATI O N 17

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